When the Stock Market Doesn’t Follow the Script, It’s Time to Rethink Your Approach.
Bitcoin - the new king of the jungle.
When you’re in one of the most traditionally bullish seasonal periods of the year, while the Fed is in the early stages of an easing cycle and liquidity measures are bullish, yet the stock market is waffling, it’s a good time to watch your 360.
Last week, I suggested the stock market needed some caffeine. This week, I’m thinking it needs a Monster, a Red Bull, and a shot of Five Hour energy, plus a triple espresso, as there is something else going on. That’s because the bond market is rethinking its current stance on inflation and taking back the recent decline in yields with the net effect being a year end plunking of stocks rather than the traditional Santa Claus rally. The net effect seems to be that, as I’ve noted multiple times recently, Bitcoin continues to benefit from the negative vibes for stocks and bonds at the same time liquidity seems to be adequate.
And of course, we may still get a yearend rally, just because it’s supposed to happen and algos are programmed to follow the script when it suits them. But no matter what; if Wall Street isn’t following the script, there’s no point in being an aggressive trader. It is a time, however, to follow the money as I discuss below.
Image courtesy of freepik.com
What could make stocks rise? Another Fed rate cut may help. Let’s see what happens at the last FOMC meeting of the year in a few days. On the other hand, another rate cut which doesn’t spur a big time rally in stocks would likely lead to a very humbug Christmas and New Year.
Take the Homebuilders… Please
Case in point; homebuilders are beating estimates and their stocks are crashing. That’s partially because their guidance is flat, but mostly because interest rates are not low enough for more buyers to take the leap of faith into buying a new home.
So, think about this for a minute. Toll Brothers (TOL) just crushed its most recent quarter and expects next year to be about the same. But the stock got crushed. That means that $3.26 billion in revenues for the quarter to go with $475.4 million in net income with a 26% gross sales margin isn’t good enough. So, Wall Street houses are tripping over each other in downgrading the stock, which is collapsing.
What’s the problem? Business is slowing down as illustrated by a reduction in the company’s back log while gross margins are starting to decrease. As a result, the company issued flat guidance for 2025.
What makes this most interesting is that TOL sells houses to very affluent customers. Thus, the projected slowing in its future sales and margins are suggest that even wealthy home buyers are struggling.
Thus, when you throw in a rise in inflation, as both CPI and the even hotter PPI numbers recently showed, you’re headed for trouble.
But TOL is not alone. As the price chart for the iShares Home Construction ETF (ITB) shows, all homebuilders took a hit with ITB falling to its 200-day moving average. And while it is certainly oversold (RSI of 30), the crashing ADI and OBV lines suggest that short sellers (ADI) are having a field day as buyers are turning into sellers in a hurry (OBV).
Ten Year Note Yield Reverses Down Trend. 4.5% in Sight.
The recently bullish tone in the bond market evaporated on the hotter than expected inflation reports. As a result, the U.S. Ten Year Note yield (TNX), the benchmark for the average 30 year mortgage rose rapidly. This rise in TNX is not just affecting the homebuilder stocks, but most of the market, as I describe below.
For now, let’s see what happens as TNX approaches 4.5%. This week’s PCE inflation report, released after the FOMC meeting, may calm things down.
Liquidity Rises. Stocks Shrug.
This is troubling. The National Financial Conditions Index (NFCI) made a new low this week, falling to -0.65. This should be bullish because the lower the number goes, the higher the liquidity level in the financial system. Yet, the stock market is in the doldrums. That means that wherever the available money is going, it’s not toward stocks or bonds.
Bitcoin anyone? Bueller? Anyone?
Bitcoin – The New King of the Jungle.
The Bitcoin bulls, rightly so, are dancing as the cryptocurrency continues to shine, displaying plenty of relative strength, especially compared to stocks and bonds.
Once again note the relationship between stocks as visualized via the New York Stock Exchange Advance Decline line (NYAD), Bitcoin (BTCUSD, middle panel) and bond yields (TNX, lower panel). in downtrends. For the early part of 2024, both Bitcoin and NYAD were closely correlated. Lately, the relationship between NYAD and BTC has changed.
Prior to March, 2024 both NYAD, TNX, and BTC were closely correlated. A decline in TNX corresponded to a rise in NYAD, as one would expect – lower bond yields favor rising stocks. During this period where TNX was falling and NYAD was rising, Bitcoin was consolidating. However, in October, NYAD began to consolidate and bond yields rose. That suggests money began to move out of stocks and bonds and moving into Bitcoin.
Given what seems to be an approaching breakout in Bitcoin as bonds fade and stocks tank, Bitcoin is the new king of the jungle. We are still long BTC at the Smart Money Passport. The position is up nearly 40% since I recommended it in October. Get the details here.
Tech Holds Its Own
As I describe above, the stock market is struggling. One sector which is holding up better than the general market is technology.
One way to play this trend is via an ETF or though owning stocks which show relative strength. The benchmark ETF for the semiconductor sector is the VanEck Semiconductor ETF (SMH). As the chart shows, even as the general market is struggling, SMH is building up and seems ready for a breakout.
SMH is hugging its 50-day moving average and is about to move above a large VBP bar (large bar, left side of chart). VBP bars signal where the heaviest money flows are. The bigger the bar the more important the level. This is a huge bar, which means that a move above it will signal big money moving into SMH. I recently recommended a tech stock, which has an even more bullish price chart at the Smart Money Passport Momentum Portfolio.
If you’re an ETF trader, consider, Joe Duarte’s Sector Selector. It’s FREE with your monthly membership to Buy Me a Coffee. Sign up here. If you’ve been thinking about starting a day trading career, my new book “Day Trading 101” will get you started on the right foot. For steady gainers, check out the Smart Money Weekender Portfolio.
Breadth Divergence Persists. Narrow Advances are Rarely Long Lived.
The New York Stock Exchange Advance Decline line (NYAD) is breaking down as the major indexes remain near their all time highs. This narrow advance is cautionary.
The Nasdaq 100 Index (NDX) made new highs last week but the ADI and OBV lines are softening. This is cautionary. Support is now at 21,000-21,250.
The S&P 500 (SPX) remains above the 6000 level. But as with NDX, the ADI and OBV lines are not keeping up. That means some money is coming out of the index. The 20-day moving average is support near 5900.
VIX Remains Below 20
The CBOE Volatility Index (VIX), remains below 20 which is a bit of a positive divergence given the recent reversal in stocks.
VIX rises when traders buy large volumes of put options. Rising put option volume leads market makers to sell stock index futures to hedge their risk and leads markets lower. A fall in VIX is bullish signaling lower put option volume, eventually leads to call buying which is bullish as it causes market makers to buy stock index futures raising the odds of higher stock prices.
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